UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, DC 20549




FORM 10-Q




(Mark One)




x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934




For the quarterly period ended March 31, 2011




 ̈
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934




For the transition period from  to




Commission File Number:  000-53643




Aurios Inc.


(Exact name of registrant as specified in its charter)




Arizona

86-1037558(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)







7608 N. Shadow Mountain Rd.


Paradise Valley, AZ 85253


(Address of principal executive offices)




(602) 321-1313




(Registrant’s telephone number, including area code)




________________________________________________________________


(Former name, former address and former fiscal year, if changed since last report)




Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No




Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). oYes oNo




Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” and “a smaller reporting company” in Rule 12b-2 of the Exchange Act.




Large accelerated filer o

Accelerated filer oNon-accelerated filer o  (Do not check if a smaller reporting company)

Smaller reporting company x




Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).


o   Yes x  No




Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:




Class

Outstanding at May 11, 2011Common Stock, no par value

3,678,000










FORM 10-Q





AURIOS INC.





MARCH 31, 2011


TABLE OF CONTENTS





PagePART I – FINANCIAL INFORMATIONItem 1.

Financial Statements.Condensed Balance Sheets—As of March 31, 2011 (Unaudited) and December 31, 2010

2Condensed Statements of Operations (Unaudited)—for the three months ended March 31, 2011 and 2010

3Condensed Statements of Changes in Stockholders’ Equity (Deficit) for the three months ended March 31, 2011 (Unaudited)

4Condensed Statements of Cash Flows (Unaudited) for the three months ended March 31, 2011 and 2010

5Notes to Condensed Financial Statements (Unaudited)

6Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

14Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

16Item 4.

Controls and Procedures.

16PART II – OTHER INFORMATIONItem 1.

Legal Proceedings.

17Item 1A.

Risk Factors.

17Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

17Item 3.

Defaults Upon Senior Securities.

17Item 4.

(Removed and Reserved).

17Item 5.

Other Information.

17Item 6.

Exhibits.

18Signatures



19ExhibitsCertifications




1





AURIOS INC.


CONDENSED BALANCE SHEETS




(Unaudited) 
March 31,
2011


December 31, 
2010ASSETSCurrent Assets:Cash

$
9,751


$
23,438Accounts receivable


1,114



975Inventory


4,334



5,135Total Assets

$
15,199


$
29,548LIABILITIES AND STOCKHOLDERS' EQUITY / (DEFICIT)Current Liabilities:Accounts payable

$
68,845


$
67,148Accrued interest


14,398



84Notes payable -  related party, net of discount


90,725



15,625Total Current Liabilities


173,968



82,857Long-Term LiabilitiesAccrued interest


-



15,623Note payable -  related party, net of discount


-



66,245Total Liabilities


173,968



164,725Stockholders' Equity / (Deficit):Common stock - no par value; 90,000,000 shares authorized, 3,678,000 shares issued and outstanding at March 31, 2011 and December 31, 2010


197,795



197,795Additional paid-in capital


37,124



37,124Accumulated deficit


(393,688
)


(370,096
)Total Stockholders' Equity/(Deficit)


(158,769
)


(135,177
)Total Liabilities and Stockholders' Equity / (Deficit)

$
15,199


$
29,548




The Accompanying Notes are an Integral


Part of the Condensed Financial Statements




2





AURIOS INC.


CONDENSED STATEMENTS OF OPERATIONS


(Unaudited)





Three Months Ended March 31,2011


2010Sales

$
4,671


$
5,120Cost of Sales


2,565



2,956Gross Profit


2,106



2,164General and Administrative Expenses


15,151



24,347Loss from Operations


(13,045
)


(22,183
)Interest Expense


10,547



98510,547



985Net Loss (Unaudited)

$
(23,592
)

$
(23,168
)Loss per share - basic and diluted

$
(0.01
)

$
(0.01
)Weighted average shares outstanding


3,678,000



2,712,400





The Accompanying Notes are an Integral


Part of the Condensed Financial Statements





3





AURIOS INC.


CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY/(DEFICIT)


For the three months ended March 31, 2011


(Unaudited)




Common Stock


Additional

Paid-in


Accumulated


Total

Stockholders'

EquityShares


Amount


Capital


Deficit


(Deficit)Balance at December 31, 2010


3,678,000


$
197,795


$
37,124


$
(370,096
)

$
(135,177
)Net loss for the three months ended    March 31, 2011 (Unaudited)


-



-



-



(23,592
)


(23,592
)Balance at March 31, 2011 (Unaudited)


3,678,000


$
197,795


$
37,124


$
(393,688
)

$
(158,769
)




The Accompanying Notes are an Integral


Part of the Condensed Financial Statements




4




AURIOS INC.


CONDENSED STATEMENTS OF CASH FLOWS


(Unaudited)





Three Months Ended March 31,2011


2010Cash flows from operating activities:Net Loss

$
(23,592
)

$
(23,168
)Adjustments to reconcile net loss to net cash used by operating activities:Amortization of debt discount


8,855



-Changes in Assets and Liabilities:Accounts receivable


(139
)


2,932Inventory


801



1,356Accounts payable


1,697



(1,942
)Accrued interest


(1,309
)


985Due to related party


-



(1,282
)Net cash used by operating activities


(13,687
)


(21,119
)Cash flows from financing activities:Proceeds from issuance of common stock


-



32,000Net cash provided by financing activities


-



32,000Net change in cash and cash equivalents


(13,687
)


10,881Cash and cash equivalents at beginning of period


23,438



6,676Cash and cash equivalents at end of period

$
9,751


$
17,557Supplemental Information:Interest paid

$
3,000


$
-Income taxes paid

$
-


$
-




The Accompanying Notes are an Integral


Part of the Condensed Financial Statements





5





AURIOS INC.


NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)





Note 1
 Summary of Significant Accounting Policies, Nature of Operations and Use of Estimates




Presentation of Interim Information




The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q for smaller reporting companies. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements and should be read in conjunction with our December 31, 2010 Annual Report filed on Form 10-K. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted, as permitted by the SEC, although we believe the disclosures made are adequate to make the information presented not misleading. Further, the condensed financial statements reflect, in the opinion of management, all normal recurring adjustments necessary to fairly present our financial position at March 31, 2011 and the results of our operations and cash flows for the periods presented. The December 31, 2010 condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. The results of operations for the three months ended March 31, 2011 are not necessarily indicative of the results to be expected for the full year.





Nature of Corporation




Aurios Inc. (the “Company” or “we”) is a corporation which was formed under the laws of the State of Arizona on August 7, 2001. Its principal business activity is the marketing of vibration and motion control technology to the audio/video markets. The Company’s sales occur throughout the United States.




Use of Estimates




The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates are used when accounting for stock-based compensation, as well as the recoverability of inventory, and the collectability of accounts receivable. These are discussed in the respective notes to the financial statements.




Revenue Recognition




The Company derives its revenues primarily from the sale of vibration and motion control devices through sales from the Company’s website and its distributors. Revenues are recognized at the time the sale is completed and shipped. Once shipped, title to the products, as well as the risks and rewards of ownership, passes to the customers.




Advertising Costs




Advertising costs are expensed as incurred. The Company incurred no advertising expense for the three months ended March 31, 2011 and 2010.




Cash and Cash Equivalents




For financial accounting purposes, cash and cash equivalents are considered to be all highly liquid investments purchased with an initial maturity of three (3) months or less.




6




AURIOS INC.


NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (Continued)





Note 1


Summary of Significant Accounting Policies, Nature of Operations and Use of Estimates (Continued)




Accounts Receivable




The Company provides for potentially uncollectible accounts receivable by use of the allowance method. The allowance is provided based upon a review of the individual accounts outstanding and the Company’s prior history of uncollectible accounts receivable. As of March 31, 2011 and December 31, 2010, there was no provision for uncollectible trade accounts receivable. The Company does not accrue interest charges on delinquent accounts receivable. The accounts are generally unsecured.




Inventory




Inventories are stated at the lower of cost (first-in, first-out method) or market value. We regularly assess inventory quantities on hand and record provisions for excess and obsolete inventory based primarily on our estimated forecast of product demand. Inventories at March 31, 2011 were determined using a perpetual inventory system with periodic counts.




Deferred Income Taxes




Deferred income taxes are provided for on an asset and liability method, whereby deferred tax assets and liabilities are recognized for deductible temporary differences and operating loss carryforwards. Deferred tax liabilities are recognized for taxable temporary differences. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that the carryforwards will not be utilized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.




Discount on Debt




During the year ended December 31, 2010, the Company issued convertible debt instruments together with detachable warrants. This resulted in a beneficial conversion feature and the value of the warrants creating a discount on the debt. The intrinsic value of a beneficial conversion feature inherent to a convertible note payable, which is not bifurcated and accounted for separately from the convertible note payable and may not be settled in cash upon conversion, is treated as a discount to the convertible note payable. This discount is amortized over the period from the date of issuance to the date the note is due using the straight line method which approximates the effective interest method. If the note payable is retired prior to the end of its contractual term, the unamortized discount is expensed in the period of retirement to interest expense.




In general, the beneficial conversion feature is measured by comparing the effective conversion price, after considering the relative fair value of detachable instruments included in the financing transaction, if any, to the fair value of the common shares at the commitment date to be received upon conversion.




New Accounting Pronouncements




There have been no recent accounting pronouncements issued which are expected to have a material effect on the Company’s financial statements.




7





AURIOS INC.


NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (Continued)





Note 1
 Summary of Significant Accounting Policies, Nature of Operations and Use of Estimates (Continued)





Stock-Based Compensation




The Company recognizes stock-based compensation based on the fair value of the award on the date of grant. The fair value of option grants is estimated as of the date of grant utilizing the Black-Scholes option-pricing model.




Earnings Per Share




The earnings per share accounting guidance provides for the calculation of basic and diluted earnings per share. Basic earnings per share includes no dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an entity.




As of March 31, 2011, warrants to purchase 247,489 shares of the Company’s common stock were not included in the determination of diluted loss per share, as they were antidilutive, and would decrease the loss per share.In addition, the notes payable and related accrued interest, were convertible into 250,379 shares of common stock, which also would have been anti-dilutive and have been excluded in the calculation of loss per share. There were no potentially dilutive securities outstanding as of March 31, 2010.




Fair Values of Financial Instruments




The carrying amounts of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and short-term loans approximate their fair values because of the relatively short-term maturity of these instruments, or for long-term debt based on borrowing rates currently available to the Company for loans with similar terms and maturities.




Note 2
 Related Party Transactions




The Company had a balance due to a related party, TGE, in the amount of $1,750 and $0 at March 31, 2011 and December 31, 2010, respectively. These are considered short term in nature and non-interest bearing.




The Company had a note payable to a related party, TGE, in the amount of $44,121 as of March 31, 2011 and December 31, 2010, bearing interest at a rate of 8.25%. All outstanding principal and interest was due and payable on December 15, 2010. In December 2010, the note and accrued interest were extended from December 15, 2010 until January 15, 2012. As of March 31, 2011 and December 31, 2010, there was accrued interest in the amount of $13,533 and $15,623, respectively.






In July 2007, the Company entered into a non-exclusive License Agreement with a related party, TGE, giving the Company rights in various patents, pending applications for patents and trademarks in various countries of the world, including the United States. The Company pays the related party five percent (5.0%) of worldwide net sales of the licensed products. In October 2007, the License Agreement was amended to provide that the royalty would begin to accrue on January 1, 2008. This agreement was terminated on February 25, 2010 as a result of the sale of substantially all of TGE’s assets to AVT; such sale included the sale of the licensed patent. The Company entered into a License Agreement with AVT and now pays AVT a royalty equal to five percent (5%) of worldwide net sales of the licensed products.




On February 25, 2010, TGE sold substantially all of its assets to AVT, an Arizona corporation.




The Company and TGE, its affiliate and former parent, entered into an administrative services/rental agreement on January 1, 2009. Under such agreement, TGE performed certain administrative duties for Aurios and provided it office space as required at $1,500 per month. Aurios has no employees and had contracted with TGE for all services. Paul Attaway controls TGE as its principal shareholder and an officer and director. This agreement was terminated on February 25, 2010 as a result of the sale of substantially all of TGE’s assets to AVT. After February 25, 2010, AVT provided administrative support and personnel to the Company at $1,500 per month under a Management and Rental Agreement that expired on July 31, 2010. During the three months ended March 31, 2010, the Company paid fees of $3,000 for the aforementioned services.




8




AURIOS INC.


NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (Continued)





Note 2
 Related Party Transactions (Continued)




On March 26, 2010, TGE, the Company’s affiliate and former parent, assigned the Company its federally registered trademark “Aurios” in consideration for a payment of $100. On April 1, 2010, TGE assumed ownership of all parts and raw materials maintained in the inventory. The Company now maintains only a finished goods inventory.




On March 25, 2010, Paul Attaway, an officer and director of the Company, purchased 48,000 shares of common stock for $0.25 per share for a total of $12,000 in the Company's private placement of common stock.




On March 26, 2010 and March 29, 2010, Ira J. Gaines and Christian J. Hoffmann, III, respectively, both of whom are principal shareholders of the Company, each purchased 40,000 shares of common stock for $0.25 per share for a total of $10,000 each in the Company's private placement of common stock.




On December 15, 2010, Ira J. Gaines, Paul Attaway, and Christian J. Hoffmann III, respectively all of whom are principal shareholders of the Company, each issued convertible promissory notes in the amount of $10,000 for a total of $30,000 to the Company. Under the terms of the notes, each note bears interest at a rate of 6.0% with principal and interest due on December 14, 2011. The notes and any accrued interest are convertible into common stock of the Company at the issuers request at a rate of $0.30 per share. As of March 31, 2011 and December 31, 2010, there was accrued interest on the notes of $533 and $84, respectively. In addition, each note holder was issued 33,333 common stock warrants for a total of 99,999 total warrants. The warrants vested immediately, have an exercise price of $0.30 per share and have a 10 year term expiring December 14, 2020. As a result of the warrants and the conversion feature, a discount was recorded on the debt in the amount of $15,000. The discount is amortized over the one year term of the debt. As of March 31, 2011 and December 31, 2010, there was $10,625 and $14,375, respectively, of non-amortized discount netted against the carrying amount of the debt.




During the three months ended March 31, 2011 and 2010, the Company paid $5,955 and $4,687, respectively, in legal services to a firm in which a principal stockholder of Aurios is a partner. He also performed or supervised the legal services rendered by his law firm. As of March 31, 2011 and December 31, 2010, the Company owed the law firm $43,067 and $43,057, respectively. In addition, on December 31, 2010, the Company converted a portion of legal fees incurred into a convertible note payable. Under the terms of the note, the company owed the firm $44,248, the note bears interest at a rate of 3.0%, with all outstanding principal and interest due on January 15, 2012, or earlier upon the occurrence of certain events. The note is convertible into shares of the Company’s common stock at a rate of $0.30 per share. As of March 31, 2011 and December 31, 2010, there was accrued interest on the note of $332 and $0, respectively. The law firm was also issued 147,490 common stock warrants, which vested immediately, have an exercise price of $0.30 per share, and have a 10 year term expiring December 30, 2020. As a result of the warrants and the conversion feature, a discount was recorded on the debt in the amount of $22,124. The discount is amortized over the one year term of the debt. As of March 31, 2011 and December 31, 2010, there was $17,019 and $22,124, respectively, of non-amortized discount netted against the carrying amount of the debt.




A schedule of minimum future principal payments on the above notes payable is as follows:




Year Ending December 31,

Principal 
Amount


Discount


Net 
Amount2011

$
30,000


$
10,625


$
19,3752012


88,369



17,019



71,350$
118,369


$
27,644


$
90,725





9





AURIOS INC.


NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (Continued)





Note 3
 Accounts Receivable





Accounts Receivable consists of:





March 31,
 2011


December 31, 
2010Accounts Receivable

$
1,114


$
975Less:  Allowance for Doubtful Accounts


-



-$
1,114


$
975




Note 4
 Concentration of Credit Risk




The Company maintains cash accounts at a financial institution. At March 31, 2011 and December 31, 2010, the Company had no uninsured cash and cash equivalents.




For the three months ended March 31, 2011 and 2010, the Company had 91% and 92% of sales to three customers and two customers, respectively. As of March 31, 2011 and December 31, 2010 receivables from its customers were $1,114 and $0, respectively.




Note 5
 Stockholders Equity





Preferred Stock:





On December 14, 2007, the Company completed a private placement of Series A Convertible Preferred Stock pursuant to the terms of a Private Placement Memorandum with accredited investors. The Series A Convertible Preferred Stock was issued at $0.25 per share. Each Series A Convertible Preferred Stock is convertible into shares of the Company’s common stock at a price of $0.10 per share after ninety (90) days from the date of issuance. The shares of Series A Convertible Preferred Stock are redeemable, at the option of the Company, on or after the second anniversary of the date of issuance, plus all accrued but unpaid dividends, on the following basis: (i) $0.30 per share if redeemed on or after the second anniversary of the date of issuance; (ii) $0.35 per share if redeemed on or after the third anniversary of the date of issuance; and (iii) $0.40 per share if redeemed on or after the fourth anniversary of the date of issuance. The Company committed to file a registration statement to register the conversion shares under the Securities Act of 1933 (“the Securities Act”), as amended, and all applicable state securities laws after the conclusion of the offering of the shares of Series A Convertible Preferred Stock by the Company. The Company filed such registration statement and it became effective in May 2009.




On March 9, 2010, 460,000 shares of Series A Convertible Preferred Stock were converted into 1,150,000 common shares.




Common Stock:




On August 31, 2009, the Company commenced a private placement of a minimum of 80,000 shares and a maximum of 400,000 shares of its Common Stock to accredited investors at a price of $0.25 per share. As of September 30, 2010, the private placement was closed and the Company had sold 288,000 shares, for gross proceeds of $72,000.




Stock Options:




The Company, under its 2007 Stock Option Plan, is authorized to grant options for up to 625,000 shares of common stock, no par value. Options may be granted as incentive stock options or nonqualified stock options. Incentive stock options shall not be granted at less than one hundred percent (100%) of the fair market value of the common stock on the date of the grant, and have exercise terms of up to ten years with vesting periods determined at the discretion of the Company’s board of directors. As of March 31, 2011 no stock options had been granted.




10





AURIOS INC.


NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (Continued)





Note 5
 Stockholders Equity (Continued)







Warrants:




The fair value of warrant grants is estimated as of the date of grant utilizing the Black-Scholes option-pricing model with the following weighted average assumptions for all grants: 5 year expected life of warrants using the “plain vanilla method”, which management believes approximates the actual expected term, risk-free interest rates of 2.01% - 2.11%, volatility of approximately 32.4%, and a 0% dividend yield.




On December 15, 2010, the Company granted warrants to purchase shares of common stock at $0.30 per share to Ira Gaines, Paul Attaway, and Christian Hoffmann III, respectively all of whom are principal shareholders of the Company, each were issued 33,333 common stock warrants for a total of 99,999 total warrants. The warrants vested immediately, have an exercise price of $0.30 per share and have a 10 year term expiring December 14, 2020. The Company valued the warrants at $0.10 per warrant using the Black-Scholes option pricing model.




On December 31, 2010, the Company granted 147,490 warrants to purchase shares of common stock at $0.30 per share to the law firm of Quarles & Brady LLP. The warrants vested immediately, have an exercise price of $0.30 per share and have a 10 year term expiring December 30, 2020. The Company valued the warrants at $0.10 per warrant using the Black-Scholes option pricing model.







Warrants Outstanding and ExercisableNumber of Shares


Weighted Average Exercise Price


Aggregate Intrinsic Value


Weighted Average Remaining Contractural Life (In Years)247,489


$
0.30


$
-



9.74





11





AURIOS INC.


NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (Continued)





Note 6
 Income Taxes




The provisions for income tax expense consist of the following:





Three Months EndedMarch 31,Deferred:

2011


2010Income tax benefit at statutory rates

$
9,200


$
9,000Valuation allowance of net operating loss


(9,200
)


(9,000
)$
-


$
-





The Company’s deferred tax asset consists of the following:




March 31, 2011


December 31, 2010Deferred tax asset:Net operating loss carryforward

$
141,000



131,800Less: Valuation allowance


(141,000
)


(131,800
)Net deferred tax asset

$
-


$
-




As of March 31, 2011 and December 31, 2010, the Company had net operating loss carryforwards of approximately $362,000 and $338,000, respectively. The loss carryforwards, unless utilized, will expire from 2027 through 2031.




Our federal and state tax returns are subject to changes upon examination. For federal income tax purposes, years 2007 through 2011 are open for examination and for state income tax purposes the years 2006 through 2011 are open for examination.




The Company’s policy is to classify any interest and penalties to income taxes in the financial statements.




12




Note 7
 Going Concern




The Company has incurred an accumulated deficit and has had negative cash flows from its operations. Realization of the Company’s assets is dependent upon the Company’s ability to meet its future financing requirements and the success of future operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.





The Company has no expansion plans that would require significant infusions of capital into its operations; however, it expects that it will need additional working capital in the next twelve months if it does not generate positive cash flow from operations. No assurances can be given that the Company will be able to raise such additional capital, when needed or at all, or that such capital, if available, will be on terms acceptable to the Company. If the Company is unable to raise additional funds, it could be required to either substantially reduce or terminate its operations.




13




Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.





Forward-Looking Statements





This Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “may,” “should,” “could,” “will,” “plan,” “future,” “continue” and other expressions that are predictions of or indicate future events and trends and that do not relate to historical matters identify forward-looking statements. These forward-looking statements are based largely on our expectations or forecasts of future events, can be affected by inaccurate assumptions, and are subject to various business risks and known and unknown uncertainties, a number of which are beyond our control. Therefore, actual results could differ materially from the forward-looking statements contained in this document, and readers are cautioned not to place undue reliance on such forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. A wide variety of factors could cause or contribute to such differences and could adversely impact revenues, profitability, cash flows and capital needs. There can be no assurance that the forward-looking statements contained in this document will, in fact, transpire or prove to be accurate.





Factors that could cause or contribute to our actual results to differ materially from those discussed herein or for our stock price to be adversely affected include, but are not limited to: (i) our history of declining operating results; (ii) our auditors have expressed a going concern opinion; (iii) our ability to raise additional working capital that we may require and, if available, that such working capital will be on terms acceptable to us; (iv) our ability to implement our business plan; (v) uncertainties regarding our ability to increase revenues and penetrate our market; (vi) economic and general risks relating to business; (vii) our ability to manage our costs of production; (viii) our ability to protect our intellectual property through patents and other intellectual property protection; (ix) our dependence on key personnel; (x) increased competition or our failure to compete successfully; (xi) our ability to keep pace with technological advancements in our industry; (xii) our ability to continue to comply with Sarbanes-Oxley Act of 2002 Section 404 in the future; (xiii) our nonpayment of dividends and lack of plans to pay dividends in the future; (xiv) future sale of a substantial number of shares of our common stock that could depress the trading price of our common stock, lower our value and make it more difficult for us to raise capital; (xv) our additional securities available for issuance, which, if issued, could adversely affect the rights of the holders of our common stock; (xvi) the price of our stock is likely to be highly volatile because of several factors, including a relatively limited public float; and (xvii) indemnification of our officers and directors.





As used in this Report, the terms “we,” “us,” “our,” and “Aurios” mean Aurios Inc. unless otherwise indicated.





General





The following discussion should be read in conjunction with our Financial Statements and notes thereto. The following discussion contains forward-looking statements, including, but not limited to, statements concerning our plans, anticipated expenditures, the need for additional capital and other events and circumstances described in terms of our expectations and intentions. You are urged to review the information set forth under the captions for factors that may cause actual events or results to differ materially from those discussed below.





Overview





We were formed in August 2001 by our former parent, TGE. Our corporate offices are located at 7608 N. Shadow Mountain Blvd., Paradise Valley, AZ 85253 and our telephone number is (602) 321-1313.





We produce, market and distribute vibration isolation products to the high-end audio and video markets in the United States and in certain foreign countries. Our products are the Classic MIB, the PRO MIB, the Isotone MIB, the Series 100 Component Shelf, a shelf product, and Pivot Points, a spike mount product.





Our vibration isolation products produce superior sound quality by sharpening, not softening, the sound. AVT holds the patents respecting our products in the United States and Taiwan. AVT has granted us a non-exclusive world-wide license to sell the products under the patents (“AVT License”). The AVT License automatically renews every year as long as we are in compliance with its terms. We pay AVT a royalty of 5% of our net sales for the license. We outsource the manufacture of our products to several qualified machine shops in the Phoenix metropolitan area. On March 26, 2010, TGE assigned its federally registered trademark respecting the “Aurios” name to us in consideration of $100.





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For the Three Months Ended March 31, 2011 and 2010




Results From Operations




Revenues




Since our inception, our activities have focused on product and market development with a nominal level of operations. Revenues for the three months ended March 31, 2011 and 2010 were $4,671 and $5,120, respectively. Revenues declined principally due to the current poor economic conditions.




Most of our sales are made through audio equipment distributors, with the balance being direct retail sales. For the three months ended March 31, 2011, 59%, 22% and 10% of sales were made through distributors, Roksan Trading Company, Galen Carol and Music Direct, respectively. For the three months ended March 31, 2010, 69% and 23% of sales were made through distributors, Bernard Knoop and Music Direct, respectively.  No other customer accounted for more than 10% of sales in either period.




Cost of Sales




The cost of sales on units sold for the three months ended March 31, 2011 totaled $2,565 (54.9% of revenues) compared to $2,956 (57.7% of revenues) for the three months ended March 31, 2010. The cost of sales for the three months ended March 31, 2011 was lower as a percentage of revenues in 2011 due to sales of slightly lower cost materials.




Gross Margin




Gross margin for the three months ended March 31, 2011 decreased to $2,106 (45.1% of revenues) compared to $2,164 (42.3% of revenues) for the three months ended March 31, 2010 due to slightly lower sales volumes of products with higher gross margins.




Operating Expenses




Prior to February 25, 2010, all selling and operating expenses, as well as research and development expenses, were incurred through a contractual relationship with TGE, which performed these services under an administrative services agreement with the Company.  On February 25, 2010, substantially all the assets of TGE were sold to AVT.  The Company entered into the same agreement with AVT and this agreement with AVT ended on July 31, 2010. These expenses were $0 and $4,500 in the three months ended March 31, 2011 and 2010, respectively. In the three months ended March 31, 2011, we had additional expenses consisting of legal expenses of $5,955 and accounting expenses of $8,266 related to being publicly held. In the three months ended March 31, 2010, we had additional expenses consisting of legal expenses of $4,687 and accounting expenses of $14,749, the differences were a result of slightly more legal and less accounting work needed in the three months ended March 31, 2011.




Interest ExpenseInterest expense was $10,547 and $985 for the three months ended March 31, 2011 and 2010, respectively. The increase was primarily related to interest expense from the issuance of convertible debt and common stock warrants and a beneficial conversion feature on debt entered into in the year ended December 31, 2010.




Income Tax Provision




The Company had a potential tax provision benefit of approximately $9,200 and $9,000 for the three months ended March 31, 2011 and 2010, respectively, arising from losses generated during the aforementioned periods. The Company has fully reserved against these benefits due to the uncertainty of their realization.




Net Loss




For the reasons listed above, for the three months ended March 31, 2011 and 2010, we recorded net loss of $23,592 and $23,168, respectively, an increase in our net loss of $424.




Basic and Diluted Loss per Share




The basic and diluted loss per share was <$0.01> for the three months ended March 31, 2011 and 2010, for the reasons previously noted.





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Liquidity and Capital Resources




Our independent registered public accounting firm has rendered a going concern opinion. We provided for our cash requirements in the first half of 2010 with the capital we raised through the sale of Common Stock yielding $72,000 in the fourth quarter of 2009 and first quarter of 2010. In addition, we have raised $30,000 in the fourth quarter of 2010 through the issuance of convertible debt to three principals of the Company. We will have sufficient capital to operate for the next twelve months through the sale of debt or equity securities, deferral of payment of certain accounts payable and, if we are able to, by generating operating income through increased sales. We can make no assurances that we will be successful in this regard. If our revenues do not increase and our cash flow is not positive or not sufficient to meet our working capital needs, we will need to seek to raise capital through the sale of our equity or debt securities. We have no commitments for obtaining such financing and there can be no assurance that we could obtain the necessary funds or obtain them on terms favorable to us. Any future financing may be on terms that substantially dilute the ownership interests of present shareholders. If we are unable to raise sufficient additional capital as necessary, we may have to suspend or contract operations or cease operations entirely. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.




We do not anticipate we will have any large capital requirements over the next twelve months. In addition, we have relationships with third parties who will manufacture small quantities of our products quickly and charge us the same lower prices as we would be charged for larger orders, particularly in the current economic environment. Accordingly, we believe we can continue to place smaller orders with a number of such manufacturers at favorable prices and will not have to allocate our working capital to the cost of surplus inventory. We work with five manufacturers.




As of March 31, 2011, we had a working capital deficit of ($158,769).




Capital Commitments




We had no material commitments for capital expenditures.




Off-Balance Sheet Arrangements




There were no off-balance sheet arrangements as of March 31, 2011 and December 31, 2010.




Critical Accounting Policies and Estimates




Our financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles. Preparation of the statements in accordance with these principles requires that we make estimates, using available data and our judgment, for such things as valuing assets, accruing liabilities and estimating expenses. The following is a discussion of what we feel is the most critical estimate that we must make when preparing our financial statements.




Recoverability of Inventory.We assume that our inventory can be sold for at least its carrying cost.




Stock Based Compensation.The Company uses the Black-Scholes option pricing model to estimate fair value of warrant grants.




New Accounting Pronouncements





There have been no recent accounting pronouncements issued which are expected to have a material effect on the Company’s financial statements.





Item 3.
Quantitative and Qualitative Disclosures About Market Risk





A smaller reporting company is not required to provide the information required by this Item.





Item 4.
Controls and Procedures





Evaluation of Disclosure Controls and Procedures





We conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of March 31, 2011.  This evaluation was carried out under the supervision and with the participation of our President, Chief Executive Officer and Chief Financial Officer, Paul Attaway.  Based upon that evaluation, he has concluded that, as of March 31, 2011, our disclosure controls and procedures are effective to provide reasonable assurance that material information required to be disclosed by the Company in their report was recorded, processed, summarized and communicated to the Company’s management as appropriate and within the time periods specified in SEC rules and forms.




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Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act are recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.





Limitations on the Effectiveness of Internal Controls





Our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all fraud and material error.  Our disclosure controls and procedures are designed to provide reasonable assurance of achieving our objectives and our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective at that reasonable assurance level.  Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.  These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.  Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the internal control.  The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.  Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.





Changes in Internal Control Over Financial Reporting





There have been no changes in our internal controls over financial reporting, as such term is defined in Rules 13a – 15(f) and 15d – 15(f) under the Exchange Act, during the quarter ended March 31, 2011 that have materially affected or are reasonably likely to materially affect such controls.





PART II – OTHER INFORMATION





Item 1.
Legal Proceedings.





We are not a party to any pending legal proceeding.  We are not aware of any pending legal proceeding to which any of our officers, directors, or any beneficial holders of five percent or more of our voting securities are adverse to us or have a material interest adverse to us.





Item 1A.
Risk Factors.





A smaller reporting company is not required to provide the information required by this Item.





Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.





None.





Item 3.
Defaults upon Senior Securities.





None.





Item4.
(Removed and Reserved).





Item5.
Other Information.





None.




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Item
6.      Exhibits.








Exhibit

Number

Description of Exhibit31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002





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SIGNATURES





Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.




Aurios Inc.Date
May 15, 2011By:
/s/ Paul AttawayPaul AttawayTitle:President, Chief Executive Officer, 
Chief Financial Officer and Director





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